For all small businesses, having a healthy cash flow is one of the key ingredients in a recipe for success. If a business can meet costs, pay its employees, and make investments – then it’s likely to be well positioned to pursue growth opportunities and prosper.
That’s where cash flow forecasting can come in handy. It can help you establish:
- Whether your business can afford to pay employee wages each month.
- Whether you’re ready to start investing and take on new clients/customers.
- When you might need to inject some extra funding to help with working capital.
It’s a good exercise to ask yourself these questions, and they’re best answered with a detailed view of your business’ finances. In the following article, we’ll suggest that cash flow forecasting should be a ’must have’ instead of a ‘nice-to-have’ when running a business.
The importance of cash flow forecasts
A cash flow forecast is a document that maps out your business’ cash inflows and outflows over a period of months or years. It’s important because it can help you make a distinction between profit, turnover and cash flow – giving you a true understanding of how much money is available in the bank.
Even if your business is generating revenue, there may be a gap between securing orders and receiving payments. While the profit/loss statement may look great, if the business isn’t being paid immediately, or is too heavily dependent on certain clients, then there could be vulnerabilities created by gaps in your cash flow that are important to know about.
Proper forecasting allow you to:
Meet your costs
A business’ ability to pay its suppliers is something that will become clearer when creating a forecast and getting a thorough overview of the financial accounts for the current quarter.
Building a reputation as a business that always pays its suppliers on time could help maintain strong relationships, and even secure new contracts through being perceived as a financially secure (and responsible) entity.
Employees are equally important to consider, if not more so, as failure to manage cash flow carefully could impact a business’ ability to pay their employees’ monthly salaries - which could in turn affect staff retention, and that would be the least of one’s worries.
Of course, there are business financing options that could help free up cash in the meantime, such as getting an advance on unpaid invoices using our digital-first alternative to invoice factoring, but only through proper forecasting is it possible to gain access to the bigger picture of how cash is flowing through the business, allowing one to determine how likely it is to change in the coming weeks and months.
Account for seasonality and changes in market
The more data included in a cash flow forecast, the more reliable the forecasts will be. By accruing and analysing years’ worth of cash flow data, it is possible to better prepare for how seasonality affects your business. For example, historical cash flow accounts could identify periods of the year where a business will benefit from buying more stock.
As such, it could be a good initiative to make a habit out of saving your cash flow forecasts in one secure location or working from a single large excel spreadsheet with years’ worth of data. Just don’t forget to make backups! Some third-party applications offer a cash-flow management service such as an app or digital platform which may be able to help you manage this process more easily for a fee.
Budget for growth
If a business is in a fortunate position whereby it’s generating stable profits, a cash flow forecast could help to build up cash reserves. Having a pot of cash that to draw upon when times are tough could prove to be useful, especially considering the last year. A cash flow reserve is something that many SMEs would be glad to have when, for example, they receive a large and unexpected order.
Do I need to get started with cash flow forecasting?
That decision is up to you, but hopefully by demonstrating the purpose of forecasting and what it could unlock for your SME, we’ve at least put the idea on your radar. If you’re interested in learning more about cash flow forecasting, check out our in-depth guide which covers all of the essentials, or read some quick forecasting tips from NatWest.
What could Rapid Cash do for you?
To be eligible for Rapid Cash you must be trading for at least 6 months, have an annual turnover of at least £100k and either be a Limited Company or Limited Liability Partnership registered in England and Wales. Additionally, you need to invoice other businesses and use one of the following digital accounting software: Xero, Quickbooks, Sage 50, Kashflow, FreeAgent and Netsuite.
Security and guarantee required. Interest on borrowing. Product fees may apply.